Outlook dims for patent wars and bubbles

Commentary: Stocks like RIM less likely to be sought for portfolios

SAN FRANCISCO (MarketWatch) — There are some signs that wireless patents are losing steam as both legal weapons and valuation boosters.

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Google’s Eric Schmidt introduces three new Motorola smartphones last September. The search giant bought the wireless-device maker mostly for its patent holdings.

Last week, a U.S. bankruptcy-court judge approved a deal by Eastman Kodak to sell its portfolio of digital-imaging patents for $527 million to a group of tech companies, including Apple Inc., Google Inc. and Microsoft Corp. The sum, about 20% to 25% of Kodak’s initial asking price, will be paid to the bankrupt Kodak in about 45 days. Read: Judge approves sale of Kodak patents.

In addition, Google’s
GOOG, -1.10%
deal with the Federal Trade Commission earlier this month included an agreement to allow its competitors access “on fair, reasonable and nondiscriminatory terms” to hundreds of patents deemed essential to standards in mobile technologies — patents acquired as part of its $12.5 billion deal to buy Motorola Mobility Inc. Google also will drop its patent-infringement lawsuits related to those patents.

That acquisition in August last year arguably represented the peak of what many took to calling the “patent bubble,” with Google shelling out billions to buy a money-losing handset maker that had racked up a huge number of patents over its long history in wireless. Federal filings showed that Google initially wanted to buy just the patents, before Motorola convinced it to pursue a full-out acquisition.

Pierre Ferragu, an analyst with Bernstein Research, wrote in a note last month that when news of the rival consortium deal first emerged, the news from Kodak, along with a November settlement and cross-licensing agreement between Apple and HTC, indicated a “deflation of the patent bubble” and a “natural consequence to the end of the Patent Wars.”

Well, maybe not quite the end.

Apple’s
AAPL, -0.87%
large, multiple-jurisdiction battle with Samsung is still going, with Samsung appealing a $1.05 billion jury verdict against it. But an appeals court also chose not to block Samsung’s infringing products from the market, as Apple had sought. Then there’s Apple’s suit against the Nexus phone over different patents in question.

The recent events, featuring fierce rivals joining together to buy patents in a group, signals that those patents are worth less than some investors had hoped. It could also mean that they are bowing to the notion that patents that are sort of technology standards that must be licensed on fair terms, as Google is acknowledging in its deal with federal regulators.

“My sense is that it is being way overdone, and our economy is being inhibited by patents rather than being enabled by them,” commented Roger Kay, principal analyst at Endpoint Technologies.

Kay said he believed there has been a tendency among many companies to “patent everything under the sun,” and that some “ridiculous” patents have been issued. “Maybe the high tide has come for that sort of competitive patenting,” he added.

One effect of the popping of the so-called patent bubble will likely be felt in the market values of companies who hold broad intellectual-property portfolios, such as Research In Motion Ltd.
US:RIMMCA:RIM
and Nokia Corp.
NOK, +0.28%
Bernstein’s Ferragu wrote last month that the abating of these patent wars was a negative for troubled firms like RIM, Nokia and Alcatel Lucent SA
ALU, -0.27%
— all of which are valued by investors primarily for their patent and IP assets.

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Indeed, Kay said that the whole point of the current “arms race” was mutually assured destruction. “The assured philosophy is get a big enough patent portfolio, threaten everyone and then lay down your arms and agree to cross-license.”

It looks like this may be finally starting to happen in certain cases. Perhaps Apple is realizing that the threat from co-founder Steve Jobs to go “thermonuclear” on Google’s Android is too much of a distraction, at least with certain companies able to pay lawyers to fight back. Perhaps other firms are finding that the patents they once prized are now quickly becoming outdated by new developments.

How all this will shake out for companies valued mostly for their patents is hard to say, but the recent deals seem to be putting some dents in their armor.

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